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Important Considerations of Selecting Errors and Omissions Insurance

When procuring errors and omissions insurance (“E&O”), most real estate brokers do not consider the implication of what occurs if a claim arises. There are two (2) important issues to address:

1. What coverages the insurance policy provides; and

2. What law firm will represent the broker/agent, if a claim arises.

These are significant considerations for the broker and must be considered when evaluating policies.

Generally, when evaluating quotes for E&O insurance, brokers look at the premium and the deductible. They fail to consider the importance of the scope of coverage and selection of counsel. Unfortunately, these items are evaluated after a claim arises and the broker is not being properly represented or coverage is denied altogether. To avoid these unfortunate circumstances, brokers should consider these issues at the time of procuring an insurance policy. What is the point of insurance, if it does not provide brokers with the appropriate protections when a claim arises?

With regard to coverage, many brokers fail to ask pertinent questions of their insurance broker as to what is covered. How extensive is the coverage? Does the coverage provide for property management? Does the coverage provide for agent-owned property? What is the policy period or extended period? How financially viable is the insurer? In evaluating coverages, real estate brokers should consider the unfortunate broker who purchased a very inexpensive E&O policy from an out of state insurer. When a claim arose, the broker tendered the claim to the insurance company only to find that the coverage provided insurance for employees only. Since the broker considered his agents to be independent contractors, no coverage was provided. Also, consider the broker who was told by the insurance company that there was mold coverage. When a sizeable non-disclosure claim arose relating to mold, the broker learned that the coverage for the mold claim was only $1,000. These policies hardly fulfill the purpose for which the insurance was purchased.

Another area which is commonly neglected by real estate brokers is ensuring that their counsel of choice is identified and approved as part of the policy. If their counsel is not selected, many times an insurance company will appoint their own attorney or sometimes, in-house counsel. In some circumstances, the attorneys are on salary for the insurance company and some actually share office space with the insurance company. This can result in poor handling and potentially even a conflict of interest. Brokers often fail to consider the result of this conflict of interest. Some of these attorneys view the insurance company as being their client, instead of the broker. Decisions are made based on the insurance company’s interests and not that of the insured. As an example, an offer to compromise was recently served by such lawyer for the broker relating to the negligence claims only. Had the offer been accepted by the plaintiffs, the insurance company would have had no further obligations to the insured, but the insured would be left with fraud claims to defend.

The real estate broker may also not receive the representation that they have become accustomed to by attorneys specializing in the representation of real estate brokers. Rarely does an insurance company appoint counsel with this type of specialty. The end result is a lack of understanding by the attorney of the insured’s business, decisions being made of, which the broker is not properly advised, conflicts of interest, decisions which are not necessarily in the best interest of the broker and a lack of consistency in the representation. Finally, claims handling is much smoother and efficient, if they are handled by broker-selected counsel who tenders the claim to the insurance company and addresses it from its inception through resolution.

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